Budget to Build Your Emergency Fund

Posted April 11 2014
by PenFed Team
image of life vests on a railing

Wouldn’t you feel better about your finances if you knew you had a financial safety net to fall back on during tough times? Building a solid emergency fund prevents life’s little emergencies from dragging you further into debt. And, a solid backup fund isn’t only about planning for a financial crisis. At some point, you’re likely to need money for good times, too—like weddings, vacations, or even a down payment on a car.

The challenge is finding a way to build your rainy day fund in the midst of day-to-day living. If you don’t have a lot of extra money, how are you supposed to peel off still more to set aside?

The Importance of an Emergency Fund

The new thinking on how much should be in your emergency fund takes into consideration how much your fund is likely to help you versus how badly it will hurt to build. The less financially secure you are, the more likely you are to need an emergency fund—but the harder it will be to save.

It’s the point in life when saving is the most difficult that it’s most important to buckle down and get it done. The less financially secure you are, the bigger you’ll want your financial safety net to be. Three months’ worth of salary is a good starting point, but you might be better off having up to six months’ worth of money on reserve.

Budgeting for an Emergency Fund

The challenge to building an emergency fund is figuring out how to divert money to savings when your budget is already tight. Good news: Your tax refund makes the perfect jump-start for an emergency fund.

The typical American family earned $53,657 last year, according to the U.S. Census Bureau, and will receive a federal income tax refund somewhere around $3,000. At this salary level, that refund would get you well over 20 percent of the way toward filling out a three-month emergency fund. That’s a safety net you can count on.

So instead of treating yourself to a splurge with your tax refund, treat yourself to financial security by building your rainy day nest egg. The idea is to put yourself at the top of your own list of financial priorities. Pay yourself first.

Once you’re on the way toward a solid emergency fund, keep paying yourself first. Set up an automatic transfer every month to move a little bit to your emergency fund—think of it like a monthly bill you pay to yourself. You won’t feel the sting when it happens behind the scenes, and your emergency fund will grow steadily without any conscious effort at all.

Choose an Account that Helps You Save

Even your checking account can help you save money. If you have monthly direct deposits of $1,000 or more per statement cycle, you may earn dividends on your balance up to $50,000 PenFed Access America Checking account. If you don’t typically maintain a high enough balance to earn checking account dividends, a PenFed Regular Savings account could be a better fit.